“But everybody does it” — Cities and states addicted to soliciting for corporate favors

Sept. 12, 2012 — When executives from the European aircraft manufacturer Airbus announced their plans to build a new $600 million factory in Mobile, Alabama in early July, local politicians wasted no time in congratulating themselves. “We have worked a long time and have put in many hours to make this announcement a reality,” Alabama Governor Robert Bentley said in a press release. “This project will create thousands of well-paying jobs that the people of this area need and deserve.”

Economic development or corporate welfare?

This is the first in a series of articles examining the widespread phenomenon of states and localities providing incentives — that is, subsidizing — to private businesses in the United States. These subsidies, in the words of one private consultant, have become so prevalent as to be “a normal part of business” and “an expected part of every location decision.”

In this article, we focus on what is and is not known about the economic impact that these subsidies have both on a local level and on a national level.

In future installments of the series, we will examine the lack of transparency that is a hallmark of incentive programs, the lack of accountability of the elected officials who provide them, and a range of ideas for how the incentive “system” might be reformed.

— Editor

Airbus wasn’t coming to Mobile for free: state and local officials had offered the company an incentive package worth more than $158 million for the plant. To some experts, those subsidies — and the fact that Airbus will compete directly with U.S. companies like Boeing — made the deal disturbingly familiar.

“Airbus is eerily reminiscent of what began happening with the automotive companies in the 1980s,” said Kenneth Thomas, a political scientist at the University of Missouri-St. Louis who has spent much of his career studying economic development incentives. “That’s not really a happy story, so I see some reason to be worried.”

Thomas was referring to the long-standing trend of Southern and Western states luring foreign automakers to build plants in their states. “Those plants were a big part of the reason for the decline of the Big Three,” Thomas said, meaning Chrysler, Ford, and General Motors. He pointed to research showing that for all 20 of the new automotive plants that opened in the U.S. and Canada in the 1980s, there was a different plant that closed in another location. The jobs at the closed plants were overwhelmingly well-paying, union jobs; the jobs at the new locations were overwhelmingly lower-paying, non-union jobs. Many economists believe that this shift diminished the overall productivity of the U.S. automotive sector, as well.

In the process, the automakers have extracted huge sums from public coffers. Alabama set a new record when it paid $300 million for a Mercedes plant in 1993, and nearly every transplant has received subsidies of some kind.

No state provides full information on the value of its annual incentives, and data on local government incentives is even more sparse making an accurate tally impossible.

The experience of the auto industry is representative of the way in which companies pit states and local governments against one another to see which will come up with the largest subsidy package. This kind of “bidding war,” which has escalated greatly in the last decade, has at best no net effect on national employment or economic growth, Thomas said, and may actually be harmful. Airbus, for example, almost certainly would have located somewhere in the United States, if not in Alabama, even without subsidies.

“We’ve just created a system where we pay them a lot of money to do something they would have done anyway,” Thomas said.

Zero-sum?

Every state has at least one program through which it offers subsidies — most have several — and these types of subsidies are widely used by counties and municipalities, as well. The subsidies come in multiple forms, and are often not directed at a specific company, but at categories of companies that are grouped by geographic area, industry, or other criteria related to job-creation or investment.

Despite the huge amount of money that is widely believed to be spent on subsidies, the system is surprisingly opaque. No state provides full information on the value of its annual incentives, and data on local government incentives is even more sparse, with few reporting any data at all, making an accurate tally impossible.

The only comprehensive estimate of the full dollar amount comes from Thomas, who took available data from a few relatively transparent states and local governments and extrapolated from that data to yield a national estimate. He estimated that in 1996 the value of those subsidies was $48 billion. In 2010, that total had grown to $70 billion. Thomas readily acknowledges that the figure is conservative and that the total is likely higher, perhaps much higher.